Business Aspects of Spotify

Spotify manages to deliver all kinds of music to users without most of its users paying a cent. It is able to do this through a variety of business practices, including advertisements and collecting marketing data about users' listening habits.

How Spotify convinces you to pay

Spotify has a solid free, ad-supported offering that a lot of people use — but this free option does come with restrictions that become more limiting after six months of using the service.

The company knows that after people on the free plan have built up a heap of playlists, established a group of friends, and ditched whatever they were using before Spotify to discover and play music, they’ll be hooked and happy to shell out for an even better version of a service they’ve been getting — without ads or time restrictions and with access to all the great stuff on their mobile devices.

Actually, Spotify doesn’t have to do a lot of convincing most of the time — when Spotify launched in the U.S. as an invite-only service, the media and blogs created so much hype around it that the Spotify invitations were a much sought-after thing. So, what did Spotify do? It encouraged people to jump the queue (as they say in Europe) and start using Spotify straightaway — as long as they paid.

It also got celebrities — particularly musicians such as Britney Spears, Justin Bieber, Trent Reznor, and Billy Corgan — to dish out free invites to their Twitter followers.

Spotify's answer to piracy

Spotify’s been operating in parts of Europe since 2008 and has 10 million users, 1.6 million of whom are paying for the service. In its birthplace, Sweden, it’s already a household name. According to the Music Ally industry news site, in 2010, Spotify made more money in Sweden for labels Sony and Universal Music Group than any other retailer, online or off, including iTunes.

This is a country famous for creating the file-sharing software Kazaa and the Pirate Bay, which were used for exchanging copyrighted music illegally. In 2007, Swedes elected the Pirate Party to the European Parliament — a party whose manifesto was essentially based around pirating music and other content for noncommercial use.

Spotify CEO Daniel Ek has repeatedly said he wants to create something that’s better than piracy, now that people are listening to more music than ever.

Actually, the Pirate Bay and Spotify have something big in common. Spotify cleverly adapts the efficient technology traditionally used for pirating music and manages to do pretty much the same thing, completely legally.

The difference is that Spotify has acquired licenses to stream those tracks from the record labels, composers, artists, publishers, agencies distributing the tracks, and so on. Getting the labels on board is hard work, and the big names have a part ownership in Spotify as a result of the deal. Spotify’s managed to convince record labels that royalties received from streaming music, although small initially, will build up over time.

Licensing is a very complex process, and it took a couple of years for Spotify to finally crack the U.S., where traditionally the record industry has been slow to embrace new technology.

Spotify shifts music ownership

The shift from ripping CDs to putting them on your hard drive was a big one, but people managed it. Now, it’s all about streaming. With Spotify, you don’t actually download or own the music as digital files; you subscribe to Spotify and access the tracks remotely, like you would if you were watching a video on YouTube. Convenient, eh?

Spotify offers three types of accounts: a free version supported by advertising and two subscription-based varieties. The others are subscription based.

Renting your music, rather than making a one-time purchase, has another upside: Each time you stream a track, you contribute to royalties. So, although streaming a track means Spotify pays out only a small fraction of a cent (the exact figures vary), the music generates more income in the long run (a phenomenon called the long tail, popularized by Wired editor Chris Anderson). Get rich slowly, if you will.

Spotify collects valuable listening data

These days, it’s going to take much longer for an artist to receive the same kind of income from streaming his music that he did with CD sales or conventional digital downloads, so he needs to know how well his tracks are doing.

In a July 2011 Bloomberg Businessweek profile on Ek called Daniel Ek’s Spotify: Music’s Last Best Hope, it’s revealed that part of the deal between record labels and Spotify is that Spotify can gather intricate information about listening trends that record labels could only dream of a few years ago.

Spotify knows your age, gender, and general location, as well as the tracks you’re listening to. Its privacy policy states how it can then provide aggregated, or not personally identifiable, listening data to its partners and throws some light on how Spotify works as a business, beyond the basic music-delivery aspect.

The Businessweek article explains that Jay-Z thought he was popular in London, but he’s actually a hit in Manchester. Spotify knows from its data that, on the weekend, more people are going to be playing Rihanna and Lady Gaga, and that radio airplay still drives streams on Spotify.

So, when you’re having your 1990s party and load up the playlist full of tracks by Hole, the Offspring, Fun Lovin’ Criminals, and Soundgarden, Spotify might detect a similar spike with other 25- to 35-year-olds listening to the same retro tracks on a Friday night.